Trump's deregulation binge puts state agencies on the spot

$800 billion insurer lumped on tiny overseer’s plate

The New Jersey Department of Banking and Insurance has 30 people supervising financial institutions. Gov. Phil Murphy has proposed adding three staffers next year—and the agency probably could use all the help it can get, thanks to a decision made last week in Washington.

The state agency is now the primary overseer of Prudential Financial, the global insurance firm that escaped the clutches of federal oversight when the Trump administration decided it was no longer too big to fail.

Pru has more than $800 billion in assets, about $100 billion more than when the Obama administration designated it "systemically important" to the financial system five years ago. Are New Jersey regulators up to the task of overseeing the Newark-based giant? Nope. That, at least, is the considered opinion of Mayra Rodriguez Valladares, who trains federal and state regulators all over the country.

"They're hard workers, all of them. Are they the caliber of federal examiners? Absolutely not," said Rodriguez Valladares, managing principal of MRV Associates. "They're not as well trained, and they struggle for resources."

Even if New Jersey employed large numbers of the best and brightest, its regulators would be hamstrung because less information about the financial system is being gathered since the Trump administration shrank a key data source: the Office of Financial Research.

Created after the financial crisis, the office is a collection of data scientists, accountants and economists who try to identify looming risks. They collect and analyze reams of information, including daily reports showing how many of a financial institution's trades or investments can be easily sold for cash—a vital metric, especially when times get tough. There's no other federal or state agency with the mandate or resources to collect data like the OFR does.

But the agency, which did not respond to a request for comment, isn't what it used to be. The Trump administration sought to cut its budget by 25%. About 40 people were laid off in August—nearly 20% of the staff. The office's regular Financial Markets Monitor report hasn't been published in more than a year. The brain behind our federal financial regulatory system has gotten smaller.

That means more of the burden falls on overmatched state regulators, whose responsibility has grown with Pru joining AIG, MetLife and General Electric's finance division in shedding the "too big to fail" label.

Big banks such as Citigroup and JPMorgan Chase are the only remaining "systemically important" institutions left in the eyes of the Trump administration, which also has effectively defanged the Consumer Financial Protection Bureau. The rollback of financial regulation is being led by Treasury Secretary Steven Mnuchin, a former Goldman Sachs executive, and Randal Quarles, a veteran public servant who became the Fed's vice chairman for supervision last year and previously was a partner at The Carlyle Group, a private-equity giant.

Although the feds no longer consider Pru too big to fail, it is still mighty large. It has $60 billion in annual revenue—40% more than Goldman Sachs. In addition to providing life insurance and investment services around the country, it's a big player in Japan and has roughly 500 subsidiaries from Korea to the Cayman Islands. It holds more than $7 billion worth of hard-to-value investments in such things as private equity, and its derivatives exposure has only increased since the firm was deemed systemically important.

"We know what happens when large parts of our diverse and massive financial system aren't policed adequately," Rodriguez Valladares said. "I'm sorry we're heading back in that direction."

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